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No split between banks and sovereign - for now - as Spain secures bailout

The assistance – of up to €100 billion – comes with terms and conditions, while banks and the sovereign haven’t been split just yet.

Ministers have approved a €100bn bailout for Spain's banks, while its premier Mariano continues an austerity agenda to close the government's deficit.
Ministers have approved a €100bn bailout for Spain's banks, while its premier Mariano continues an austerity agenda to close the government's deficit.
Image: Andres Kudacki/AP

EUROZONE FINANCE MINISTERS have formally agreed to a bailout of up to €100 billion for Spain’s banking sector – in a move which confirms that the Spanish taxpayer will still, for the time being, remain responsible for ensuring the loans are repaid.

In a statement this afternoon ministers said they had unanimously agreed to grant financial assistance, after the European Commission recommended providing a loan to recapitalise the national banks.

This, it added, was “warranted to safeguard financial stability in the euro area as a whole”.

Ministers said the terms and conditions applied to the loan would “of bank-specific measures”, including detailed plans for restructuring the plans and wider reforms of the banking sector.

“This conditionality will be enshrined in a Memorandum of Understanding that will be signed in the coming days,” it said.

The loans will be channelled through the Fund for Orderly Bank Restructuring (FOBR), a Spanish government agency, with the government formally retaining full responsibility for the financial assistance.

This means that any proposal to split formally split the sovereign and banking sectors has not been brought to fruition for the time being, though the statement stops short of asserting that the payments will be added to Spain’s national debt.

From one fund to another

Funding will be drawn from the European Financial Stability Facility until the new permanent bailout fund, the European Stability Mechanism, is established – which is likely to formally occur on July 9.

Ministers asserted that neither fund will have preferred creditor status, a move which will encourage third party investors who would stand a greater chance of receiving at least some compensation if the banks were allowed to go to the wall.

The EFSF has set aside €30 billion to cater to institutions which need the recapitalisation as a matter of urgency.

“The Eurogroup is convinced that the reforms attached to this financial agreement will contribute to ensuring a return of all parts of the Spanish banking sector to soundness and stability,” ministers said.

The deal – reached through a teleconference of ministers this morning – comes the morning after widespread protests across Spain at a €65 billion package of government austerity measures announced by prime minister Mariano Rajoy.

Though the terms and conditions for the Spanish banking bailout will specifically apply to the banks and not to the government itself, Spain is still under an ‘excessive deficit procedure’ under which it is required to take action to bring its budget deficit within EU limits.

The cost of borrowing for the Spanish government this afternoon cleared the 7 per cent barrier, standing at 7.23 per cent for a 10-year loan.

Read: Huge protests erupt across Spain against €65bn austerity cuts

Explainer: Everything you wanted to know about the bond markets but were too afraid to ask

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Gavan Reilly

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